Source: Golden Ten Data

The dollar is expected to record a rise in the first quarter as Federal Reserve officials continue to oppose the market's interest rate cut bets.

On Wednesday, Federal Reserve Governor Waller's hawkish remarks fueled speculation that the Fed is not in a hurry to relax its policies and that the pace of cutting interest rates lags behind other central banks. This prompted traders to cut their bets that the Federal Reserve will begin easing its policy in June.

The inflation index favored by the Federal Reserve will be announced on Friday, and Powell will also deliver a speech. If both support people's speculation that the Fed is not in a hurry to change its policy, the dollar may rise further.

Rabobank strategist Richard McGuire (Richard McGuire) wrote in a report to clients: “The market's reaction to the personal consumption expenditure (PCE) data to be released tomorrow may be quite asymmetrical. Higher than expected data will lead to a significant repricing of interest rate cuts.” He was referring to the core PCE, which excludes highly volatile food and energy prices.

The prospect that the Federal Reserve may cut interest rates later has strengthened the dollar's relative appeal. Last week, the SNB became the first developed market central bank to cut interest rates, while hawkish members of the Bank of England softened their positions.

Simon Harvey (Simon Harvey), head of foreign exchange analysis at Monex Europe, wrote in a report that Europe's “obvious cyclical weakening” means that the ECB needs to “far surpass the Federal Reserve in terms of easing this year.”

Meanwhile, although the Bank of Japan raised interest rates for the first time since 2007, it failed to change the trend of strengthening the dollar against the yen.

Harvey said that the outlook for a stronger dollar could push EUR/USD down to 1.07 in the next few days. EUR/USD has fallen below 1.08 for the first time in a month.

Futures traders currently expect the possibility that the Fed will start cutting interest rates in June at about 60%, down from nearly 80% a week ago. Rabobank strategists say traders may completely abandon predictions of interest rate cuts in June.

The reason why the former second-in-command of the Federal Reserve predicts that central banks will cut interest rates in the summer

Richard Clarida (Richard Clarida), a global economic adviser to Pacific Investment Management Company (Pimco) and former vice chairman of the Federal Reserve, said in a report on Tuesday that if policymakers from the Federal Reserve, the European Central Bank, and the Bank of England implement interest rate cuts in the summer as suggested by senior officials last week, then don't expect them to justify interest rate cuts by downplaying the importance of the 2% inflation target.

Although Powell stressed that they need more confidence, inflation will continue to fall to 2% to prove that interest rate cuts are reasonable. However, some strategists believe that Federal Reserve Chairman Powell's remarks last week were abandoning the promise of a 2% inflation target.

Clarida does not agree with this statement. He believes that when interest rate cuts begin, “these leaders will probably not try to justify policy changes because they are satisfied with the temporary inflation target of 'around 2%. ' Instead, I expect them to reaffirm that monetary policy is already tight, so given that they expect the inflation rate to fall to the long-term target of 2% over time, gradually cutting interest rates while the rate falls is only a way to prevent the policy from becoming more tight.”

But if inflation in these economies does not rise as predicted, but instead stabilizes at a reasonable 2.5% level, what should central banks do? Clarida said, “Under these circumstances, the central bank may suspend the interest rate cut cycle. However, they may be very reluctant to restart interest rate hikes; instead, they believe that as long as policy interest rates remain limited for a sufficient period of time, they can trust that the inflation rate (eventually) will return to the 2% target.”

Editor/jayden